Remote working's tax implications

As remote work arrangements, enabled by technology, become more popular, it’s not just companies and their employees who stand to benefit. Studies show that flexibility in working arrangements can produce significant benefits for the broader economy and act as a catalyst for improved productivity and growth.

At the same time, this trend is challenging traditional notions of personal income taxation in a crossborder context.

Already we’re seeing signs that the enforcement of existing rules is stepping up and, looking ahead, global mobility teams may face a period of uncertainty and disruption as governments begin to examine existing crossborder personal tax and social security rules in the context of increasingly virtual workplaces.

Benefits and drawbacks

In September 2021, KPMG International’s global webcast on Work from Anywhere issues found that nine out of 10 companies are considering introducing a remote working policy or have already introduced one.

A study by the US National Bureau of Economic Research suggests that working from home will persist beyond the pandemic for several reasons, including better-than-expected experiences; new investments in physical and human capital; and the pandemic-driven surge in technological innovations.

The study predicts that employees will enjoy large benefits from greater remote work – especially higher earners – while companies could see a 5% productivity boost due to re-optimised working arrangements.

The European Agency for Safety and Health at Work’s assessment similarly notes the benefits for organisations and individuals in terms of flexibility, autonomy, performance and work-life balance, although it also acknowledges drawbacks, such as inadequate working conditions, excessive working hours and unpredictable schedules, which it aims to deal with through legislation and policy.

For economies more broadly, the European Commission identifies home-working arrangements and temporary work from another jurisdiction (teleworking) as major factors in achieving both growth and better work-life balance, and has noted that as well as increasing resilience and productivity, this could also ‘contribute to the green transformation of economies and help bring vulnerable groups into the economic mainstream’.

Remove obstacles

For companies, the tax and legal implications are the biggest obstacle to realising the full potential of remote working, according to the KPMG survey. Governments could remove some of these barriers by revising thresholds for triggering taxation, social security obligations and permanent establishment determinations, thereby modernising the legislation to address the current and future working arrangements and promoting economic growth both regionally and globally.

For government revenues, the impact of losing workers within their jurisdiction to remote work elsewhere could be substantial. This is especially true among OECD countries, which take in up to five times more in personal income taxes than they do in corporate income taxes. OECD corporate tax statistics show that OECD countries derive an average of only 10% of their total tax revenue from corporate income tax, while revenues from personal income tax account for 23.5% of total tax take, and social security contributions for 25.9%. The commentary notes that higher earners pay the largest proportion of these taxes and are more likely than lower earners to be able to work remotely.

With high levels of employee demand for remote work, the potential for future tax disruption from mobile workers could be tremendous. EU research shows that 31% of jobs in Europe can be done remotely, similar to US research findings of 37%. Further, in a survey of 10,000 people across 12 markets in Europe, the Middle East and Russia by Cisco Systems, 87% wanted the ability to choose where, how and when they work, even though only 5% had worked mainly from home before the pandemic. 

Race to the bottom?

The OECD’s recommendations on post-pandemic tax and fiscal policy priorities observed that rising international taxpayer mobility, driven by digitalisation, could hinder the functioning of personal tax systems by enabling individuals, especially wealthy ones, to relocate more easily to tax-favourable locations. The Tax Foundation has similarly warned that if large numbers of workers take up remote work in locations with low taxes on personal income, then authorities would need to consider how this might affect their revenues and how it should influence policy.

An article by Rita de la Feria and Giorgia Maffini, published in the British Tax Review, echoed these concerns, noting that there are signs that competition is already under way; they wrote that ‘there is early anecdotal evidence that, faced with these challenges, countries will respond by competing for the same base, with characteristics similar to the race that has been taking place for many years in relation to [corporate income tax], but with potentially more significant economic and societal consequences’.

According to the OECD, this could drive up tax burdens on less mobile, lower-income people. It is advising governments to start looking at tax policy options that are adapted to a world where employees are increasingly mobile.

Early action

As temporary emergency remote work situations give way to more formal arrangements and governments struggle to raise revenue to cover pandemic-related shortfalls, tax authorities are taking more interest in enforcing existing rules in crossborder work situations. In the coming years, governments are likely change their tax rules so they can better guard against revenue losses from mobile employees.

Global mobility teams would do well to monitor trends and developments so they can manage emerging tax risks while ensuring their companies and workers enjoy the increased productivity, job satisfaction and other benefits that remote work can generate.

Mobility teams can also work with the business to design a structure for remote working with appropriate policies, guidelines and monitoring mechanisms.

All organisations need to develop the right infrastructure to support remote working on a large scale. At the same time, mobility teams should have technological tools that help them track and manage compliance for remote workers. These will strengthen the organisation’s position for whatever legislative changes might come as well as its ability to prosper from digitalisation and remote work’s substantial benefits.